* Fed outlook, U.S. bank test results boost sentiment
* European shares extend rally
* U.S. dollar hits 11-month high against yen
By Luciana Lopez
NEW YORK, March 14 (Reuters) - The dollar rallied and U.S. Treasury yields soared on Wednesday, boosted by a brighter economic outlook from the Federal Reserve and news that most U.S. banks passed stress tests.
Stocks in Europe climbed to a near-eight-month peak, and the dollar notched a fresh 11-month high against the yen.
Yields on U.S. Treasuries hit their highest level since October and German 10-year bond yields spiked to a three-week high as demand for safe-haven government debt waned.
“Equities are getting the message that they are cheap relative to bonds, which is the other side of bonds getting the message that they are extremely expensive,” said Alan Ruskin, head of G10 currency strategy at Deutsche Bank in New York.
But U.S. equities were mixed after a five-session rally took indices to multi-year highs in the previous session.
The Fed said late on Tuesday it expects “moderate” growth over coming quarters, with the unemployment rate declining gradually, versus the “modest” growth the central bank said it expected in January.
Many analysts took the view that a further round of asset buying by the U.S. central bank is now less likely.
The Fed also said that most of the largest U.S. banks passed their annual test of how they would fare in an economic crisis, a report that underscored the recovery of the financial sector but called out a few laggards, including Citigroup Inc.
“Certainly this is good news for the overall domestic financial system,” said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.
“It really shows banks have turned themselves around, raised capital significantly and are being much smarter and less aggressive about their capital positions, and that should give investors confidence in the system.”
Hints of a brighter outlook crept across the Atlantic as a slight rise in euro zone industrial production data for January ended two consecutive monthly falls and pointed toward the bloc’s eventual recovery.
But the impact of high oil prices kept optimism in check, weighing on growth prospects and dampening hopes that Europe’s debt crisis might be easing.
In contrast, economists in a Reuters poll said the U.S. economy will gain traction this year after a sluggish first quarter, even as the potential threat from higher oil prices pushes analysts to raise their inflation expectations.
The Fed’s latest statement, which made no direct mention of policy easing, was in line with recent stances adopted by the European Central Bank and the Bank of Japan to wait and see the impact of measures already taken.
“Major central banks, including the Fed, ECB and the BoJ, have stepped off the gas pedal and we’ll likely need another deterioration in economic data before additional liquidity is provided,” analysts at Morgan Stanley said in a note.
The Dow Jones industrial average was up 13.92 points, or 0.11 percent, at 13,191.60. The Standard & Poor’s 500 Index was down 2.18 points, or 0.16 percent, at 1,393.77. The Nasdaq Composite Index was down 2.00 points, or 0.07 percent, at 3,037.88.
The FTSEurofirst 300 pan-European index of top European shares was 0.37 percent higher at 1,099.41 and hit its highest intraday level since July 26, while the MSCI world equity index dipped 0.21 percent.
The dollar rose 1 percent to 83.69 yen. The euro weakened 0.49 percent to $1.3018, touching its lowest since Feb. 16.
“It may prove a temporary phase, but at present the U.S. dollar is benefiting from higher relative yields reflecting the outperformance of the U.S. economy over other major developed economies,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
The upsurge in risk appetite crimped demand for safe-haven government debt. The benchmark 10-year U.S. Treasury note was down 31/32, the yield at 2.2364 percent.
Brent and U.S. crude dipped in choppy trading as data showed a big jump last week in crude stocks at the Cushing, Oklahoma, hub and an overall rise in crude inventories that was in line with expectations, countering drops in refined products stocks.
Brent crude slipped 0.24 percent to $125.92 a barrel. U.S. crude dropped 0.69 percent to $105.97 per barrel.